Sticking Points: Common-Agency Problems and Contracting in the U.S. Healthcare System

43 Pages Posted: 21 Feb 2017

See all articles by Brigham R. Frandsen

Brigham R. Frandsen

Brigham Young University - Department of Economics

James B. Rebitzer

Boston University School of Management; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics; Bard College - The Levy Economics Institute

Michael Powell

Northwestern University - Kellogg School of Management

Date Written: February 2017

Abstract

We propose a "common-agency" model for explaining inefficient contracting in the U.S. healthcare system. In our setting, common-agency problems arise when multiple payers seek to motivate a shared provider to invest in improved care coordination. Our approach differs from other common-agency models in that we analyze "sticking points," that is, equilibria in which payers coordinate around Pareto-dominated contracts that do not offer providers incentives to implement efficient investments. These sticking points offer a straightforward explanation for three long observed but hard to explain features of the U.S. healthcare system: the ubiquity of fee-for-service contracting arrangements outside of Medicare; problematic care coordination; and the historic reliance on small, single specialty practices rather than larger multi-specialty group practices to deliver care. The common-agency model also provides insights on the effects of policies, such as Accountable Care Organizations, that aim to promote more efficient forms of contracting between payers and providers.

Suggested Citation

Frandsen, Brigham R. and Rebitzer, James B. and Powell, Michael, Sticking Points: Common-Agency Problems and Contracting in the U.S. Healthcare System (February 2017). NBER Working Paper No. w23177. Available at SSRN: https://ssrn.com/abstract=2920395

Brigham R. Frandsen (Contact Author)

Brigham Young University - Department of Economics ( email )

130 Faculty Office Bldg.
Provo, UT 84602-2363
United States

James B. Rebitzer

Boston University School of Management ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617 353 4605 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Bard College - The Levy Economics Institute

Blithewood
Annandale-on-Hudson, NY 12504
United States

Michael Powell

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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